Energy Economics and the US Dollar: Side Show

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Here is the San Francisco Bay Area we have a dangerous cultural phenomenon playing out on the streets. It’s called a “side show” where groups of people use Twitter and text messaging to randomly select a location to rapidly assemble in their cars and motorcycles to perform spins, wheelies, and other dangerous stunts and then disperse before the cops arrive. This is the modern version of the drag race, but people can and do get hurt.

We have a similar kind of “side show” playing out in the chatter about the value of the US dollar and its implications for energy prices. Recently that side show has taken the form of press rumors that there is a conspiracy to dump the US dollar as the world’s reserve currency for a basket of others. Separately, but playing on the same theme are the periodic rants from the bad boys of the world from Iran, Venezuela and others blessed with oil but cursed by stupid leaders who urge shifting oil trading into some non-dollar denomination.

There are problems with the value of the US dollar but being dumped as the world’s reserve currency is not likely to be a consequence of its current weakness. Let’s face it, who else in the world would put up with all these other countries, can float as much debt to create a cash pool big enough to park other currencies, or has the underlying maturity and financial strength (even today) to be the market clearinghouse for the global economy?

So what does this have to do with energy?

Commodity markets particularly in oil have been used, and abused, as a way to compensate for the weakness of global equity markets, currency fluxuation, and to increase the liquidity for traders in a time of market uncertainty. But the cure for that is to strengthen economic fundamentals, restore confidence in the markets, and shift focus from a need to CYA near term to growing earnings and valuation long term.

Yes fundamentals matter both for the broad economy of nations and the world—as well as energy. On the energy side, we are engaged in a rather healthy debate right now about our energy future, mix of fuels, sources of power generation and the price we are prepared to pay as consumers to achieve the emissions reduction aspirations of our politicians. The recession is buying us time (how’s that for sick logic?) to have this debate, but reality is setting in sooner than some politicians had hoped.

For the same reasons the US dollar is likely to continue as the world’s reserve currency (there simply is no practicable alternative!) I suspect the world’s energy balance will come through this period of reflection and debate recognizing the realities that the fastest path to a cleaner environment is through healthy, productive, growing economies around the world where investment in new technology is made, energy efficiency in new plant and equipment is built in to expansions, and the social policy is worked out to enable global markets to work efficiently with the least distortion from trade barriers, subsidies, or misguided industrial policy experiments.

Don’t expect that prescription to come from Copenhagen or Washington or Brussels or Beijing. But competitive global markets have a way of enforcing balance, and consumers still look out for their own economic self interest. So the best defense for both nation states and individuals is healthy, competitive, open world markets including energy.